On February 26, 2024, the Ethereum Foundation website underwent a discreet modification. The footer of the website and the warrant canary were removed, indicating that the foundation is under investigation. The Ethereum Foundation cannot provide further details due to a confidentiality clause.
According to anonymous tips reported by Fortune, the United States Securities and Exchange Commission (SEC) is conducting a probe into the foundation as part of an effort to classify Ethereum’s underlying asset, Ether (ETH), as a commodity. This investigation comes at a critical time as the SEC’s deadlines for approving Ether exchange-traded funds (ETFs) approach.
The debate surrounding whether Ether is a security has been ongoing for several years, but doubts are now starting to arise. The SEC’s investigation raises questions about why they are examining the Ethereum Foundation nearly a decade after its launch and whether the SEC has jurisdiction over an organization based in Switzerland. Additionally, there are concerns about potential delays to the upcoming spot Ether ETF and the impact on Ethereum and the broader crypto market if it is classified as a security.
While the Ethereum Foundation cannot provide specific details about the investigation, it is possible that the SEC is seeking information from the foundation to assist in another investigation. If the foundation is under investigation, it could take several years for the SEC to move from an investigation to a lawsuit.
The ongoing investigation could have negative implications for Ethereum until the case is resolved. It could affect the approval of an Ether ETF and hinder the further adoption of the asset. If Ethereum is classified as a security, it could have a cascading effect on other crypto projects, potentially leading to the downfall of many companies in the sector.
Crypto exchanges that list Ether and operate in the U.S. markets would be required to support an asset classified as a security. They would need to choose between delisting Ethereum or registering as securities broker-dealers with the SEC. Registering as a securities exchange requires extensive disclosures and approval from the SEC, making delisting a more likely option for many exchanges.
While the Ethereum Foundation is based in Switzerland, the SEC can claim extraterritorial jurisdiction if the challenged activity has a material impact in the United States. In the past, the SEC has imposed worldwide injunctions on companies based outside the U.S. if their activities had an impact on U.S. territory.
If centralized exchanges shut down ETH trading in the U.S., decentralized exchanges (DEXs) could become an alternative. DEXs, with their decentralized nature and global reach, may be able to continue operations despite regulatory challenges. However, DEXs would still face compliance requirements in certain jurisdictions.
While classifying Ethereum as a security would have negative short-term effects, there could be positive long-term outcomes. The Ethereum Foundation and the SEC might reach a resolution where the foundation pays a fine and registers as a security in the U.S. markets. This would provide regulatory clarity and could be beneficial for the crypto market valuation in the long run.
If the SEC takes the Ethereum Foundation to court, the outcome would have significant implications for Ether’s market valuation and the broader ecosystem built on the Ethereum blockchain. It could potentially become the most important lawsuit in the crypto ecosystem.